China Extends Tax Break Program to Spur Economy

By KEITH BRADSHER

April 2, 2014

HONG KONG — The Chinese government on Wednesday announced a modest package of economic stimulus measures, the latest sign of concern by Beijing that growth may be slowing more than expected.

The State Council, China’s cabinet, decided at a meeting to extend tax breaks for small and very small enterprises through 2016 and said it was considering a significant broadening of those breaks.

The council also gave a strong hint that it was preparing a broader response to recent signs of economic weakness, which have included lackluster business orders, industrial production and investment.

“Officials attending Wednesday’s cabinet meeting also said China will improve macrocontrol in 2014 with measures to stimulate enterprises, expand domestic consumption and boost employment,” the government said in a statement distributed shortly before midnight by Xinhua, the state-controlled news agency. “There will also be fiscal help in coping with unexpected challenges.”

The statement contained few other details, except to mention that railroad construction would be carried out rapidly and the renovation of rundown urban neighborhoods would continue. China plans to open 6,600 kilometers, or 4,100 miles, of new rail lines this year, an increase of 1,000 kilometers, or 620 miles, from last year. Prime Minister Li Keqiang had said the government would build or renovate homes for 4.7 million people currently living in makeshift shelters.

China also intervened in currency markets on a huge scale in late February and through March, issuing torrents of renminbi so as to buy up dollars. That had the effect of at least temporarily driving down the value of the renminbi about 1 percent, which helps make Chinese exports more competitive in foreign markets. The extra renminbi moving through the economy also brought down short-term interest rates, making it easier for troubled real estate developers and other large borrowers to continue borrowing.

But the scale of China’s measures so far is much smaller than in 2009, during the global financial crisis. China limited its slowdown then with a huge spending program. The nation’s central bank also expanded China’s broadly measured money supply on a scale that dwarfed what the Federal Reserve achieved in the United States with its “quantitative easing.”

Chinese leaders have called repeatedly since then for a shift toward consumption-led growth, but achieving that has proved difficult.

The Asian Development Bank in a report on Tuesday called for governments across Asia, including China’s, to adjust their fiscal policies to promote economic growth that is more inclusive of the poor. Zhuang Juzhong, the deputy chief economist of the Manila-based regional lending institution, said in an interview in Hong Kong on Wednesday that China relies heavily on consumption taxes to finance government spending, which does little to address the country’s gap between rich and poor.

Consumption taxes, mainly a value-added tax that reaches 17 percent for a wide range of consumer goods, represent almost half of government revenues in China. That compares with less than a third of government revenues in most affluent countries.

At the same time, China has struggled to figure out how to introduce property taxes, which would tend to fall more heavily on the rich, and collects only a tenth of government revenues through personal income taxes, compared with roughly a third for affluent countries.